Book Review - Oil on the Brain

Posted by Robert Rapier on November 14, 2009 - 11:03am

Oil on the Brain by Lisa Margonelli was recommended by Paul Sankey at the 2009 Energy Information Administration Conference as a book that provided great insight into the oil industry. I have had it on my list of books to read, and recently picked it up to read during my travels. I have been traveling a lot lately, and I like to read while I travel, so I knocked it out over the past couple of trips I have taken.

The premise of the book is that a person who doesn't know much about the oil industry sets out to find out what it is really like on the inside. It reminded me in some ways of Crude World by Peter Maass (which I reviewed here). The biggest difference is that Margonelli was approaching the subject from a pretty basic starting point, and Maass had written quite a bit about the industry when he tackled Crude World.

I guess I never cease to be amazed by what people think the oil industry is like, and what it is really like. People seem to think that the oil industry is a bunch of guys in a smoke-filled room who conspire to set prices. To be honest, that's probably the way I viewed the industry when I was growing up. And still, my first reaction to my cable bill going up is "Those greedy cable companies are ripping me off." The big difference with the cable companies, though, is that their profits aren't thrust in everyone's faces at the end of every quarter. Every time oil prices do spike up and oil companies show nice profits, people do feel like they have been taken advantage of. But I digress a bit.

For this book, Margonelli embedded herself within various sectors of the oil industry. She spent time throughout the supply chain, hanging out at a gas station in California where she found that the owners made more money on candy and soda than they did on gasoline. She spent a day with a tanker truck driver and his dispatcher, and spent time in a refinery and on an oil rig. She even got inside the Strategic Petroleum Reserve, which is typically off limits to visitors. She traveled abroad to Chad, Venezuela, Nigeria, and even Iran to understand the world of oil and what is has meant to these regions.

Here were what I thought were some of Margonelli's more interesting observations. She spoke a lot about the indirect costs of using oil. In talking about oil spills, she mentioned that her view of an oil spill had always been dominated by the Exxon Valdez. She had never connected these spills to her own fuel usage, but learned that drivers and boaters spill more oil every year than did the Exxon Valdez. The number she cited was 19 million gallons of oil products spilled each year in our waterways by boaters and auto drivers.

She wrote about the notion that oil companies are in a conspiracy to set prices. A jobber she spoke with - someone who has to buy fuel from the oil companies - said "There are eleven studies which show there isn't a conspiracy. Chevron, Shell, Exxon - they hate each other. It's like war daily. For them to collude is insanity, but people believe what they want to believe."

On that topic, she noted an episode of hypocrisy displayed by Nancy Pelosi. One day in 2006 Pelosi told a group of school children that we hadn't done enough to reduce our dependence on gasoline, and so demand was high and that's why the price was high. Then she got in front of the cameras and she cited the conspiracy of big oil and the Republicans working for their interests. But as Margonelli noted, "the myth of conspiracy overwhelms reason, particularly when pump prices and oil company profits are high." I think the lesson there is "If the talking point is working, keep pushing it."

She met an old-time wildcatter named Michel Halbouty (now deceased) who complained that the country has not had a coherent energy policy in 30 years. He advocated more promotion of domestic energy exploration, and fears a slow slide into deindustrialization. He noted that the main problem is that "People. Don't. Care." As long as they can pull in and fill up, they just don't care about energy policy.

In China, she met with someone within the government who was involved with energy policy. He noted that it would be a disaster for China to move toward an American way of life, but he says that cars are clearly there to stay in China. On GDP, Margonelli wrote that China requires 4 or 5 times as much energy as Japan per point of GDP. Finally, the minister commented that China needs "a bigger space to survive under U.S. hegemony." On that point, she also spoke with a European analyst who said that U.S. hegemony is a part of China's strategy; that if they can get the U.S. to bear the expense of maintaining the energy status quo, they will have the time and resources to retool their economy.

In the epilogue, Margonelli comments that there is no such thing as cheap gas; that there are hidden costs throughout the supply chain. But the population has come to expect cheap gas as a "grand bargain" with the government and the oil companies. When the price goes high, they look to the government to punish the oil companies so prices will come back down.

One weakness in the book is that it really didn't address the question of depletion. It seemed to take at face value that oil will continue to be available and business will continue as normal for decades. However, I note that Margonelli was at the ASPO Conference this year (along with Peter Maas; I am sorry I missed that) so she got a heavy dose of peak oil information. Some very interesting comments by her can be found at this story covering the conference.

As one might expect, Margonelli emerged from her experience with a radically different view of how the oil industry works. I have to agree with Paul Sankey's assessment that it does provide great insight into the industry, from a very basic starting point and with a balanced view. As one reviewer pointed out, it could have been titled "The Petro-economy for Dummies", which is to say it is a book that is easily understood by those with zero knowledge of the industry. This book would be on my short list of books to recommend to people who want to know what the industry is really like.

Robert, fantastic review, thanks a million. Lisa Margonelli sounds like a very level headed an now a well informed lady. Too bad she did not address the question of depletion. Perhaps she will do that in a forthcoming book. But she hit the nail on the head about people and what they desire to believe about the oil industry.

Chevron, Shell, Exxon - they hate each other. It's like war daily. For them to collude is insanity, but people believe what they want to believe."...

"the myth of conspiracy overwhelms reason, particularly when pump prices and oil company profits are high."

I read an article yesterday that stated that "peak oil" was a theory developed and propagated by the oil industry in order to keep prices high. And we read almost daily, comments on Drumbeat, that high oil prices are the result of a conspiracy by speculators, or hedge fund managers, or whomever. Oh well.

I read an article yesterday that stated that "peak oil" was a theory developed and propagated by the oil industry in order to keep prices high.

This has been an on-going theme of Raymond Learsy ("Over a Barrel") who writes a regular blog on Huffingtonpost.com and is an investment adviser for energy stocks. He hates Matt Simmons. He insists that its all a big conspiracy between oil companies (big oil), OPEC, and the government to jack us all around. I have challenged him numerous times to produce evidence and he simply avoids the discussion. If he does anything he will cite some obscure news item as proof of his contention. On top of it he seems to have a following of people who praise his "investigative reporting".

Several days ago I wrote the editors at HuffPo asking why they had not covered the IEA revelations. They were nowhere to be found as far as I could see. No reply. I asked if their editorial policy was to back up their contributors, many of whom seem to be personal friends of Ariana Huffington, by overlooking important stories that seem to negate what they had been posting. No answer.

I used to rely on HP for a summary of news items. But now I don't think that is going to be reliable. My conclusion is the blogosphere is turning into just another biased medium. Next we'll be comparing HP to Fox news.

I would criticize the oil companies, but it would only be in the sense of insisting that they be more open with production and reserves data. Learsy does it out of some conspiracy of price fixing or something like that.

The link you posted had nothing to do with The Huffington Post. If they covered it then please post the link. I tried, with Google and News.Google to find such a link and came up empty. Here is the latest edition from The Huffington Post and Raymond J. Learsy and his conspiracy theory.

Far be it for the industry to play it straight, to simply state that price as currently constituted has nothing to do with market dynamics of supply and demand. Something far more sinister is afoot and it is long past due that our oversight agencies such as the CFTC take a very serious look at how our commodity exchanges are contributing to these distortions.

That piece was simply an overview of the situation with rare earths and the virtual monopoly the Chinese have over them, not a screed against Prii. She did have an article about a year ago advocating mass marketing of cheaper smaller cars that would be more affordable to low income drivers, to more quickly increase overall fleet mileage, as opposed to the fixation on expensive hybrids. Can't find the link at the moment, it was a sort of "attack" on these pricey green vehicles, but in its wake sales have been robust anyway, even with the recession.

"Chevron, Shell, Exxon - they hate each other. It's like war daily. For them to collude is insanity, but people believe what they want to believe."...

According to Yergin's book (The Prize), the major players did try to collude several times, but it was not very successful as long as there was an oversupply. It's hard to say they hate each other. They do go into joint ventures overseas. Now OPEC has some degree of control over wellhead prices, but only in times when supply gets tight. For the downstream segments of the industry, I have to agree with RR and Margonelli.

There is probably a grain of truth in the idea that segments of the oil industry profit from peak oil and subtly advance the theory. Boone Pickens has been pushing it, largely because of his investment positions. Rockman admitted a few days ago that his exploration company needs high prices to thrive.

Exactly. It's just as naive to say they hate each other as to say they are literally 15 guys in a smoke filled room setting prices. Probably 75% of their goals - government regulation, overseas protection, propaganda, labor relations - are greatly aided by their working together. You think when they were in those meetings with Dick Cheney they were attacking each other's companies? Gasoline prices are one part of their profitability. And maybe not the greater part, in today's world. Just as good is getting the expense of environmentally protective regulations shifted from themselves to the public.

No, they don't really hate each other, but they do tap each others telephones and watch each other with binoculars.

The oil industry is the only one I know of where the industrial spies hold conventions and advertise in the yellow pages. They're called "oil scouts". It's a cozy business where they all know each other. We used to hire spies to spy on the spies that used to spy on us.

If there is something going on at your own company that management won't tell you about, the best way to find out is by taking your opposite number at the competition out for lunch and buying drinks. (You often do this because you never when you might find yourself working for them). They'll know what's going on because they've read all your confidential e-mails and browsed through all your trash cans for unshredded documents.

The reason gasoline prices move in unison is that everybody knows what everybody else is going to do in advance. But, it's not a conspiracy any more than the CIA used to conspire with the KGB.

I sure am glad to find one pro with first hand knowledge posting something on industrial spying inside the oil industry.

For a while there I was beginning to think there was some sort of professional rule that prevented anyone with expertise from admitting it-sort of like the rule that if you earn money out of the professional wrestling business you can never admit it is faked.

I find it entirely unreasonable to think that people investing money by the tens and hundreds of millions of dollars aren't willing to spend a little here and there for some inside poop on what the competition is up to; or that there aren't plenty of fired, laid off, retired, or just mad at thier employers workers willing to spill the beans.

Not to mention independent truck drivers, salesmen of specialty machinery , lonely plain jane clerks , and just plain stupid low level managers who can't help but brag about what they know to thier drinking and poker buddies.

I expect when the stakes are really high many an engineeer or accountant or programmer is hired away from a competitor more for what he knows about the competitor than what he knows about his profession..But I guess that is technically not spying.

The thing about spying in the oil industry is that 1) It's an old tradition, 2) You can't really stop it (a drilling rig in the middle of a farmer's field is hard to hide, and there's no law against someone in the next farmer's field watching with binoculars, especially if he slipped the next farmer some cash) and 3) everybody does it.

The last point is important because there's a legal rule called the clean-hands doctrine. If you want to sue someone for spying on you, you better not be spying on them. And you are, so you can't sue them.

As for hiring away the competitors' talent, you don't have to because they laid them off during the last downturn. You just make it known that you are looking for consultants with experience in a certain area, and they show up at your door.

Eventually, everybody is a consultant, moving from project to project. Oil companies find this convenient because they only contract them when they need them, and when they don't need them, they go and work for the competition.

There's no conspiracy involved, it's just that information has become a fungible commodity, available to everyone who can pay for it. (I love that word, fungible.)

"Just as good is getting the expense of environmentally protective regulations shifted from themselves to the public."

Some regulations are useful, some not, but either way, make no mistake: the expense is always shifted to the public. Contrary to addled populist "thinking", no magic fairy stands by waiting in the sky to pay the bills. These are businesses not charities - for example, last time I checked with my favorite local labor-union activist, unions were not investing in pension plans for the purpose of giving away money (though there are always ongoing ethical discussions.) Neither are individuals.

If these businesses don't pass on the expenses, they'll simply go bankrupt, possibly quickly, or possibly gradually as investment funds head for more politically-favored lines of work, such as sports, which enjoy no end of limitless subsidies. Since they can't practicably be liquidated anytime soon, they'll be subsumed into some government department picking massive direct subsidies from the taxpayer's pocket.

So if you think we're hearing the bellyaching now, you've heard nothing yet. Just you wait till Joe and Jane Sixpack pull up to the pump only to find a "no gas" sign taped over it - in the same manner as they might find a massive queue and a circular firing line of "use next window" signs at a government office now.

(Now, we can certainly have a jolly good time sitting around idly and bashing executive pay if we like. However, for as long as Joe and Jane remain, say, absolutely content to fork over $1500/year into cable or satellite TV - very nearly pure royalties to corporate executives and to filthy-rich "stars" most of whom contribute nothing to society save for moronic "entertainment" - Joe and Jane remain utterly without standing to participate in any such conversation.)

I do not agree; the expense is usually, but not always, shifted to the public, in the sense that corporate profits could conceivably be higher were they allowed to simply dump waste into a lake. You can argue that they then "pass the cost" of regulation along to the customer via higher prices, and they do - but not all of it, otherwise, they would simply accept all the regulation and put a fee labled "government regulation fee" on the bills. Why would they spend so much money fighting regulation if they could pass it on? Most of it, they pass along, but not all.

And, indeed, a magic fairy HAS paid the bills for a number of failing businesses this year - the public taxpayer.

Most complaints about outrageous executive compensation focus on those firms (Goldman,AIG,etc.) only able to exist with taxpayer money seized through ownership of politicians-it has absolutely nothing at all to do with what somebody pays for cable TV or what some baseball player makes.

The last thing the major oil companies would ever want would be any advance of the peak oil theory. They have a long history of very strongly refuting the theory.

I was interested when only a few majors, Chevron for instance, suddenly reversed their strong anti-peak oil positions on their websites about two years ago and suddenly started talking indirectly (clearly for those who understand the issue but indirectly) about significant energy issues. Exxon is still an absolute denier.

Why would they never want the cat out of the bag? 1. It would drive prices up dramatically, as foreign suppliers realized how precious oil is and charged more 2. It would also drive up current prices because investors would pour money into oil because of it's future value. The value of something in the present should be based on its value in the future. 3. The negotiating power of the majors would be significantly reduced if the future value were perceived. I believe BP just took a fixed deal in Iraq for $4 flat profit per barrel no matter what the price. Their negotiating power is already fading.

Of course exploration companies need high prices to thrive. Right now many of the majors lose money on exploration and have been for years. That alone tells you oil is going higher. For instance, some figures I remember were that one major was loosing about 60 cents for every dollar it invested. They often use capital to buy shares instead of investing it in exploration because there isn't much to find at these prices.

In my first course in economics I learned that the most important basis for the whole art or science, is that there are supply and demand curves and in the long run, prices are determined so demand and supply always move toward equilibrium.

Boone Picken's is as rich as he ever needs to be and is in 80's and is a hero. He didn't need to invest and push natural gas to make money, he is doing it because he absolutely understands peak oil and what it will shortly do to this country.

wall street -- Please allow me to be blunt (I just got into the office after working on a well all night.I'm bushed and not feeling to patient. First of all, probably 90%+ of all oil companies don't give a crap if the public embraces PO or not. Thjey are privately owned and what the public does or doesn't beleive won't affect them. I assume by your screen name you think the public companies are the whole game. They are not. Secondly, high prices are not needed to thrive. Most of the companies I've seen fail did so during high price periods. Success in the oil patch is based on how much it costs you to find the reserves...not what you sell it for. As I just pointed out eslsewhere, the greatest profits I've ever delivered was when oil was $10/bbl. Last year when oil hit $147 there were companies failing...their finding costs exceeded $200/bbl. Thirdly, how much money a company spends, or looses, in their exploration effort has no bearing on the price of oil. As you point out, it's the supply/demand balance.

I gather you hang on the words of the public CEO's. They are not the spokesmen for the industry...they are only representing their companies.

The only reason I bothered to reply at all to SF is that he attacked Boone and you. I knew you could and would defend yourself so I didn't mention his criticism of you, just of Boone.

I don't fully understand your point about high prices but I am guessing we would probably agree. Supply is increased at any price given a set cost of exploration costs and my point was simply that higher prices are needed, over exploration costs, to increase supply.

I don't follow the public CEO's at all in general and I probably get 80% of all my info from the OilDrum. The points I was making were directed at the conspiracy theorists who think peak oil is made up by people who just want to profit from the idea of peak oil.

I call myself wallstreetexpress because I once worked on Wall Street in a staff position and because I will generally defend capitalism as a certainly flawed but generally superior and more efficient form than socialism or communism or dictatorship every time. The one point I would firmly disagree with is that the private companies don't care what the public thinks. The public votes and the party in power and which politicians prevail has a big influence on public policy, access to land and resources and tax policy.

wse -- Sorry if I sounded like I was jumping on you (not an excuse but it really was a bad night). More of a cumulative reaction to a number of posts. As far as private companies not caring about public opinion all I can do is refer to daily converstions I have with these folks. It's even more then not caring...it's commonly outright hostility. We have been the evil bad guys since the dawn of time. We have no expectation of public opinions being nothing but detrimental to our interests as well as their own future. In a way it might benefit the debate if the bigger private owners were to express themselves publicly. Trust me: it would be very blunt and very ugly. And it would contrast greatly with the words of the public CEO's. My company exists for one reason only: the absolute stupidy of the public and the unwillingness of the gov't to take concrete steps to deal with PO. We know that regardless of what my owner might say publicly (he is not a man to mince words) his opinions will just be written off as dishonest and self serving (silence would be much more self serving IMHO).

I'll offer one last comment about the way insiders I deal with look at the PO situation: the majority of the time the comments regarding PO, if there are any at all, center around the price we're paying with the body bags coming through Dover. In general they have complete contempt for public and gov't attitudes and see them eventually getting exactly what they deserve for their ignorance/self interest. It's only the sacrifice of our troops for oil that generally animates our conversations. True story: at 3:30 this morning got to hear my drilling super vent his anger (had not worked with him in a couple of years). His friend, another old fart driller, lost his 38 yo son in Iraq last winter. He fell right back on the old and time honored hope that the public (which is always willing so swap blood for oil in his opinion) will eventually "freeze in the dark". The vast majority of the public rejoices when they see stories about indusrty cut backs and layoffs. My most common mental flash when I think about PO is the coffins rolling off the ramps of those transports. It's not our profits, long gas lines or drilling rigs from horizon to horizon.

wse -- Sorry...got a little emotional and didn't answer your most pertinent point IHO. High prices = common failures. Easiest answer given your background: how many folks do you know that lost their butts buying into the market when it was at historic lows? And how many folks do you know made those big gains buying into the market when it was booming? Pretty much the same dynamics in the oil patch. By far the best profits are generated when oil prices are lowest (and it does help when the prices spike LATER). Gotta remember that time lag. Usually takes a couple of years to recover your initial investment.

sf -- I'm not sure I've seen many companies pushing PO for any reason. Boone pretty much stands alone but he has his own agenda. As far as segments of the industry profiting from PO it depends on your time frame. PO will drive the price of oil upwards over the long haul. But a company's profits aren't determined by the price of oil...it's determine by how much oil you sell at a certain price. PO is essentially a cancer that is slowly killing the oil industry. Over the next 20 years or so you will see a stream of companies going out of business. Simple economics; can't make a profit from what you don't sell. And can't sell oil if you don't find it. Even $200 oil won't help companies survive if they can't find enough reserves to replace what they produce.

We don't need high oil prices to thrive...we'll do just fine where prices are now. And as I've pointed out before: high prices don't make a successful oil company. Successful drilling makes a successful oil company. My previous most financially successful effort came in the mid 80's when oil was $10 and Ng was less than a dollar. As always, it's not what you sell your oil/Ng for that matters...it's what is cost you to get it out of the ground.

Also: can you name any business that doesn't need high prices to thrive? I can...Wal-Mart. Again, it's not how much they sell their stuff for...it's the margin that counts.

I have always believed that the problem with the community thinking that fuel prices are either too high or are being ripped off is the fact that the prices are "in your face" every time you drive around virtually every corner.

In fact, fuel prices are the lowest.. or close to, of any processed liquid that can be purchased. Yes even water. Think about what you pay in the supermarket for the stuff.

Whenever one goes on holiday.. the prices of holiday accommodation takes a hike.. food etc.. all does... but does one whinge...no..... because the price is not in your face all the time !

Think about what your house cost say.. in 1980..1970..1960.. and now... now how much did fuel cost in 1980 compared to now... % wise.... you may be surprised at how cheap the stuff is.

It's interesting what a Reviewer will pick out from a book. I read Oil on the Brain about a year ago and remember some of what the Reviewer mentioned, but not other items. I've passed this book around to a number of friends, viewing this book as a good one for "interested beginners."

My favorite part of the book was the author's visit to an Iranian oil platform, which is a first by a Westerner for many years, apparently. She also spends some time in Venezuela and a number of other exotic locales.

The book is highly entertaining and written in a breezy style. If it doesn't dwell on Peak Oil, so be it, a lot of other books (and blogs) do. Besides why stress the obvious?

What "the public" believes is so far from what I've learned by paying attention to the Oil Drum and other sources. 1) What oil companies do is over the top amazing; 2) Layoffs mean lost expertise; 3)Oil companies don't have the control we'd like to think they do; 4) there are irresponsible and crooked players trying to line their pockets at the expense of others; and 5) no one speaks for everyone, and 6) what oil companies acting in their own interests do--private, majors, and nationals--won't change supply outcomes very much.

Of course, dismissing oil company conspiracy creates a problem for the peak aware crowd too, does it not?

Since the consensus of the oil companies is that there is no danger of peak anytime in the near future, if ever, and we assume there is no conspiracy by them to speak with a same or similiar voice, is it assumed that we must take the word of those who know most about oil and gas production, independently arrived at if there is no conspiracy mind you...that peak is not a problem?

Let's be honest here, in some ways the peakers need to believe in oil company conspiracy as much as Nancy Pelosi does...because The Oil Drum can scream about peak at the top of it's lungs, but Exxon or The American Petroleum Council can come out and hit every channel with advertisements right at network news time (and only the alert even watch news nowadays, so they have the most influentual audience) and say "No peak, don't worrry, we just need to be allowed to drill in glaciar national and all will be well". Who do you think the public (a)hears, and (b)believes? And of course the oil industry doesn't speak with the same voice, they hate each other, even TOD agrees, right?

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